When contemplating divorce, there are many complex issues to become familiar with such as tax implications, equitable distribution, alimony, and child support. In the case where one of the parties to the divorce owns a business interest, there are additional valuation and equitable distribution issues to consider. Early in 2005, with the issuance by the New Jersey Supreme Court of the Steneken decision, the areas of valuation, equitable distribution, and support became considerably more interdependent. They also became decidedly more complex. As a result, the Steneken decision, and the concept of “double-dipping” which it addresses, has become one of the hottest issues facing valuation professionals today.
The concept of “double-dipping” refers to the consideration of a marital asset in both the determination of support and the division of marital assets (equitable distribution).
In the Steneken case, Mr. Steneken owned a business and drew a salary in excess of $200,000 per year. During the course of valuing Mr. Steneken’s business, his valuation expert determined that Mr. Steneken’s “reasonable compensation” was in the range of $150,000. The $50,000 “excess” compensation was added back to earnings and capitalized at a rate of 24%, thus increasing the value of the business by approximately $240,000. Mrs. Steneken was awarded 35% of the business in equitable distribution and alimony based on the reasonable compensation of $150,000.
Mrs. Steneken appealed, arguing that the family’s lifestyle during the marriage had been supported by Mr. Steneken’s actual salary of more than $200,000. On remand, the trial court agreed, and increased her alimony award based on Mr. Steneken’s actual salary. Although the decision was appealed based on the argument that Mrs. Steneken had already received her share of Mr. Steneken’s “excess” compensation by virtue of the fact that it had already been capitalized and distributed in equitable distribution, the appeal failed, and the New Jersey Supreme Court affirmed the trial court’s decision.
The implications of this decision for the business owner are far reaching. Business owners typically pay themselves a salary that is, at best, discretionary. For those business owners getting divorced, be aware that the court appears not to be concerned with whether or not salary is “reasonable” for purposes of determining alimony awards.
Noël J. Capuano, CPA, CVA, is a Manager and Certified Public Accountant in the Litigation Support Group at WithumSmith+Brown‘s Princeton office, NJ.